Equity turned to region as dollar sales flattened under ex-CBK Governor’s last months

Equity Bank Group made thrice the amount of money trading dollars in the regional market than what the bank made in forex trades in Kenya, lifting subsidiaries contribution to the bottom line to almost half.

Half year results show that Equity made Kes8.4 billion in the period trading forex in East Africa up from Kes5 billion in a similar period last year of which the Kenyan unit’s contribution stayed flat at Kes2.8 billion.

The first half of the year were the last for former Central Bank of Kenya (CBK) Governor Patrick Njoroge, who was accused by market players for aggressive policing of the forex market that collapsed the interbank and created parallel exchange rates.

Dollar scarcity in Kenya market

Although the country has set to fix the interbank and have replaced Dr Njoroge with Dr Kamau Thugge, who promised a liberal forex market, trouble still remains.

The Kenya Association of Manufacturers said there is just marginal improvement in daily availability of dollars and it still remains a challenge to the extent that working capital of manufacturers gets tied up in advance purchase to build the required reserves for any commitments.

Parallel exchange rates are still a thing with banks trading the Shilling around 150 units to the greenback all the way above CBK indicative 143.58 to the dollar.

For lenders like Equity Bank, regional diversification has meant local troubles can be leveraged with diversification into other jurisdictions.

And it is paying off. Equity Bank Kenya made an after tax profit of Kes15.5 billion while its subsidiaries across Congo, Uganda, Tanzania, Rwanda and South Sudan made ten billion more, pushing the Group’s net profit to Kes26.3 billion.

Read also: Equity’s first-quarter profit up 8 percent to Sh12.8 billion

Contribution by Equity subsidiaries

Equity’s proceeds from loans hit Kes26.2 billion up from kes21.5 billion but at the Group level revenues nearly doubled to Kes44.5 billion up from Kes35.2 billion.

“Regional geographical expansion and business diversification has seen reliance on contribution of the Kenyan banking subsidiary reduced with other subsidiaries contributing 46% total assets and 45% of Profit Before Tax, driven primarily by insurance and the DRC business,” Equity Group Managing Director, and CEO Dr. James Mwangi said.

But the expansion comes with its risks including need for capital support, the possibility of instability and currency depreciations in emerging markets.

Equity Bank says it has remained resilient despite a tough operating global macro environment characterized by stubbornly sticky high inflation, high interest rates, volatile exchange rates and devaluation of emerging economies currencies.

Dr Mwangi said the bank has taken a defensive strategy with sufficient capital buffers and focusing on lending to the good borrowers to reduce the level of default.

Loan loss provision

The bank has also set aside Kes7 billion from the profits to provision for possible defaults up from Kes4 billion meaning the bank sees defaults rising. Equity bank has already seen nearly 60 percent rise in gross non-performing loans from Kes61 billion to kes97.5 billion.

“Despite the challenging macro and micro economic environment, focus on asset quality management saw the Group register an NPL ratio of 9.8 percent against an industry average of 14.9 percent. Prudent management saw growth in cost of credit risk to 1.9 percent up from 1.3 percent driven by 89 percent growth in provisions to cover the risk of rising portfolio at risk (PAR) ratio,” Dr Mwangi said.

Equity Group, however, continues to grow strongly diversifying not only geographically but on business lines, with strong growth in non-interest income. Total income grew at 24 percent driven by a 42 percent growth of non-funded income and 17 percent growth of net interest income.

The growth was led by trade finance revenue that grew by 117 percent with trade finance related lending growing by 46 percent, FX total income grew by 68 percent and diaspora flows grew by 146 percent to account for 12 percent of all client FX volumes.

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